Are Fair Lending exams ever perform NOT in the context of a 'protected class'? Will a thorough Fair Lending exam scrutinize underwriting 'fairness' in treatment for people from the same class?

For example, one lender approved a $5000 unsecured loan loan to a single while male with a credit score of 500.

But then another lender denied a similar loan request from a single while male, who had a credit score of 600.

Or is the Fair Lending exam really only looking for worst loan/best approval in context of protected classes?

Thanks

There are generally 3 types of exams. Policies/procedures, redlining and data anomalies are looked at [almost] every time.

If there are anomalies in the HMDA data, regulators will look at: (2) approvals vs denials [comparative file review] and for approvals (3), rates and terms. Because they rely on the HMDA data, they usually do comparisons based on race, gender, ethnicity and location.

That being said, if a loan is approved (or denied) significantly outside of normal underwriting guidelines regulators will look at it. How is it discovered? Committee minutes, selected as sample for another type of review, selected in review of non-performing loans, etc. They will also look at 2nd review comments, etc. If there are differences in poorer loans made, or better loans being declined, they have a habit (depending on time and experience) to ask questions.

We are small enough that we are not a HMDA reportable bank. AND we really don't have any official underwriting guidelines. I say that tongue-in-check, yet it's sadly true. No specific credit score or DTI limitations. Individual lender authority and lender discretion.

CC - what you said is ripe for treating people different, even inadvertently. I am very surprised that the regulators have let the bank even be chartered without a lending/underwriting policy. Underwriting guidelines are necessary to manage risk and treat all applicants fairly.

In most banks, a junior underwriter will interpret policy more conservatively while a seasoned loan officer knows how far they can go. This in itself can be an issue as an applicant can be declined by a less seasoned LO, while someone with fewer credentials can be approved by a LO with more seniority. I would push for policies to define the risk the bank wants to take, act as a training tool for employees going into the credit area of the bank.

Good luck

Fair lending exams are all about identifying risk. Actual violations really aren't cited as even the DOJ uses phrases like "alledged" as courts are probably the only place a violation could be determined (apart from overt evidence of disparate treatment). Therefore, your examiners will be evaluating your risk for discrimination against a protected class by reviewing you policies, procedures, and controls. As Rocky stated, a lack of defined lending criteria in a policy is a big red flag for fair lending risk. That said, if you are under $45mm in assets (as you said you were too small to be a HMDA reporter), then you probably only have 1 to 3 lenders in the first place. Even if that is the case, you will still want to implement as strong of a control as possible as fair lending is probably one of your greatest compliance risks (it always is).

In my opinion, one of the best ways to reduce your fair lending risk is to create both a formalize exception program and a formalized review of adverse action notices. Doing this will allow your bank to identify gap like you explained previously. In a small bank like yours, it would be ideal to create some sort of "exception council" where all (both) of your lenders get together pro-actively before any exceptions are made. The goal would be to compare the potential exception with past denials and to avoid inconsistencies. To do this, of course, you would need to define your acceptable standards so that you are clear on what needs to go to the group. Apart from that, you could start making group underwriting decisions...

Again, fair lending is a big deal and it sounds like you have a few red flags in your current program.

Good luck.

We do have an established written loan policy, but there are no specifics as to credit score or DTI ratios, per se. It's hard to document 'exceptions' to policy when the policy is so vague and gray (specifically written that way to give lenders the most flexibility)It's always a great sign when a borrower goes to one branch and is declined. Then goes to another branch and is approved!!

Yikes. Sounds like a red flag to me.